Prescription Medicine Spending Trends

FICTION: Drug costs continue to soar past the average rate of inflation and continue to be the largest portion of total health spending.

FACT: Prescription medicines have always comprised a small share of total health spending and in recent years the rate of growth of spending on prescription drugs has slowed markedly.

Prescription drug price increases have been in line with overall medical price increases since the passage and implementation of the Medicare prescription drug program, according to a September 2006 Milliman, Inc. report.

AARP relies on the wholesale acquisition cost (WAC), which does not reflect the prices paid by consumers at the retail pharmacy. Instead AARP should use the change in the Prescription Drug CPI (CPI-P) as the more reliable and relevant measuring tool. The CPI-P reflects a full range of factors that typically affect retail prices, including wholesale costs, discounts manufacturers negotiate with distributors or other customers, product distribution costs (i.e., getting the product to the pharmacy), pharmacy mark-ups, and dispensing fees.

Prescription medicine spending increases are at their lowest level in a decade, according to data from CMS.

IMS Health reports that total U.S. prescription drug spending continues to decline. They reported that: in 2004, drug spending grew at 8.4 percent; in 2005, drug spending growth was 5.4 percent; and, only 5 percent growth for the 12 months ending in July 2006.

Data released by CMS in January 2006 show continuing deceleration in prescription drug spending since 1999. CMS projects that spending will continue to slow this year.

Since 2000, prescription medicine prices have increased at about the same rate as overall medical inflation, according to the government’s publicly available data for overall medical inflation. This information comes from Milliman, Inc., which tracked the consumer price index for prescriptions (CPI-P) in its “Prescription Medicine and its Place in the Medical Care CPI: December 2004 Report.”

Prescription medicines account for 10 cents of every dollar spent on health care in the United States, according to the Centers for Medicare and Medicaid Services (CMS).

90 percent of all health care spending in the United States paid for hospitals, doctors, nursing homes, other health services and administrative costs.

Prescription drugs’ share of spending – which includes both brand and generic drugs, along with the cost of pharmacies – is not projected to rise to 11 percent until 2015, according to CMS.

Prescription medicines can play a vital role in reducing overall health care costs by helping keep patients out of the hospitals. In fact, a March 2006 NBER paper found that the use of medicines that help treat hypertension reduced the amount of hospitalizations for stroke by 38 percent and for heart attacks by 25 percent in one year, and that if those with hypertension were treated according to guidelines, an additional 89,000 deaths, and 420,000 hospitalizations could be avoided.